Saturday, July 14, 2007

"Fair" Share of Taxes; "Fair" Trade vs. Free Trade

The data above (click to enlarge) are from the Congressional Budget Office's (CBO) report Historical Effective Federal Tax Rates, for the year 2004, showing that:

1. The top 20% make 48.8% of after-tax income, make an average of $143,600 after-tax, and pay almost 85% of all federal income taxes paid, at an average rate of 25.1%.

2. The top 1% make 12.2% of after-tax income (average after-tax income of $867,800), and pay almost 37% of all federal income taxes, at an average rate of 31.1%.

3. The average tax rate for the bottom quintile is 4.5% and increases to 31.1% for the top 1%, indicating a highly progressive income tax system.

In today's NY Times article "
Fair Taxes? Depends What You Mean by ‘Fair’," Harvard economist Greg Mankiw poses the question: "Do the rich pay their fair share in taxes? This is likely to become a defining question during the presidential campaign."

Citing some of the CBO data above, Mankiw then comments, "Fairness is not an economic concept. If you want to talk fairness, you have to leave the department of economics and head over to philosophy."

MP:
Mankiw makes a good point about fairness being subjective and philosophical, although you'll find no shortage of politicians waxing philosophical about "fairness" when it comes to topics like taxes and trade, especially those who want to raise taxes and erect trade barriers.

For example, whenever you hear politicians or Lou Dobbs talk about "fair trade" instead of "free trade," you'll pretty much be guaranteed that the discussion has left the realm of economic theory and empirical evidence of the benefits of free trade, and ventured off into a philosophical/political discussion justifying using the political process to bestow protectionist trade policy favoring a well-organized domestic, special-interest industry at the expense of consumers, in the philosophical interest of "fairness."

Bottom Line: Any time you hear politicians use the words "fair" or "fairness" in relation to tax policy, look out for higher taxes, and any time you hear those words in regards to trade, look out for protectionist trade policy.

10 Comments:

At 7/15/2007 9:45 AM, Anonymous jeff said...

Prof. Perry,

But what the redistributionists will say is that it isn't progressive enough. Why? Because from 2003-2004, the average after-tax income of the bottom 20% decreased while that of the highest 20% increased. And of course the rational explanation is that the rich are exploiting the poor and stealing from them. So tax the rich some more, they can afford it.

Though in reality it has nothing to do with affordability; or virtue; or kindness and charity. It's a political answer for an economic problem pure and simple. And as we know, political decisions in these matters tend to have disastrous long-term economic consequences.

 
At 7/15/2007 11:42 AM, Blogger Grodge said...

How about a graph on total tax burden. Just looking at income taxes is cherry-picking.

And as a finance professor, you know that.

 
At 7/15/2007 11:34 PM, Blogger Mark J. Perry said...

The link provided in the post to the CBO study provides a detailed breakdown of all federal taxes including individual taxes, payroll taxes, excise taxes, corporate taxes, etc.

I selected individual income taxes for the graph because: a) it's the largest single source of federal taxes by far, b) it is income taxes that receives the most attention, c) it is the federal tax that is the most progressive, d) it is the federal tax that will be debated most by politicians in the upcoming election and e) it is the federal tax that will most like be changed (increased or decreased) most often.

 
At 7/16/2007 9:37 PM, Blogger Marciaq said...

Mark Perry says:

"I selected individual income taxes for the graph because: a) it's the largest single source of federal taxes by far,

So you eliminate all non-federal taxes, including property tax, state income tax, state gas, alcohol, and cigarette taxes, sales tax, and many kinds of fees and so on. Many of which are not progressive at all.

" b) it is income taxes that receives the most attention,"

Republicans make sure of that. In fact right now property tax is one of the most burdensome.

" c) it is the federal tax that is the most progressive,"

Which makes your argument look a lot better than it is. Very clever.

" d) it is the federal tax that will be debated most by politicians in the upcoming election"

Because it's the one the Republicans hate more than any other except the estate tax because it dares to expect that those who've gotten so much from America and its government have to pay more for it. Or do you think, for example, that we should get rid of the patent office and its costs paid by all of us?

" and e) it is the federal tax that will most like be changed (increased or decreased) most often."

Also true of state taxes.

By the way, we know that the richer you are, the easier it is to hide income. So the amount of income listed on your table is likely to be very accurate for the bottom 10%, and get more and more unreliable as we go up the ladder.

Thus we learned that Theresa Heinz paid very little income tax because her income comes from municipal bonds, which are tax free.

Now we read that many CEO's income taxes are paid for by the shareholders - and even the taxes on the taxes.

In the WSJ editorial page awhile ago, Michael Milken said that 10% of Americans own 90% of stocks held by Americans.

That's the kind of data that you don't mention when ranting about how billionaires are suffering.

 
At 7/17/2007 6:10 AM, Blogger juandos said...

So let's get to the nub of it Marciaq, you think its a good thing for polticos to extort from the productive so they can pander to the parasitic, right?

You then say: "By the way, we know that the richer you are, the easier it is to hide income. So the amount of income listed on your table is likely to be very accurate for the bottom 10%"...

And you have something credible to back this up, right?

So I ask you Marciaq, are you a socialist or communist?

 
At 7/17/2007 7:41 AM, Anonymous bob wright said...

How about this for those who favor progressive income taxes: progressive voting.

Since progressiveness is such a good idea, instead of one man one vote, each person would be awarded a number of votes proportional to their tax rate. The more you pay in taxes , the more votes you get.

 
At 7/17/2007 12:21 PM, Anonymous Walt G. said...

"The more you pay in taxes , the more votes you get."

That already happens. Rich/higher income and retired people vote at a much higher percentage rate than younger and poor people vote.

 
At 7/17/2007 1:36 PM, Anonymous bob wright said...

Maybe so, but votes are not allocated progressively.

A higher percentage of a smaller group can be overwhelmed by a smaller percentage of a larger group.

Try this: A person in the top 10th percentile of total federal tax payments should get ten times the votes of a person in the bottom 10th percentile.

 
At 7/17/2007 1:51 PM, Anonymous Walt G. said...

"A higher percentage of a smaller group can be overwhelmed by a smaller percentage of a larger group."

You're right, but money has more power than votes, so it somewhat equals out. Who do you suppose has more influence with a politician: One millionaire or 100 voters who make $10,000-per-year each?

 
At 7/17/2007 2:02 PM, Anonymous bob wright said...

Walt,

Yes, but McCain-Feingold solved the "too much money in politics" problem, remember?

Now it's illegal to criticize politicians 60 days prior to an election.

 

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